Bloomberg News

SEC Seeks to Halt Citigroup Case Pending Settlement Appeal

December 20, 2011

(Updates with details from filing in third paragraph.)

Dec. 16 (Bloomberg) -- The U.S. Securities and Exchange Commission asked to halt its case against Citigroup Inc. over mortgage-backed securities while the agency appeals a federal judge’s rejection of a $285 million settlement that was proposed to resolve the dispute.

The appeal, filed in the U.S. Court of Appeals in New York, challenged U.S. District Judge Jed Rakoff’s refusal last month to approve an accord resolving claims that Citigroup misled investors in a $1 billion financial product linked to risky mortgages.

Rakoff criticized the agency’s practice of settling without requiring the subject of the allegations to admit wrongdoing. The Manhattan judge said the Citigroup settlement didn’t provide him with “any proven or admitted facts” to inform his judgment. The SEC said it wanted to preserve agency resources by putting the case on hold while the appeals court considers Rakoff’s ruling.

“In addition, if this action is not stayed, the commission may lose permanently the benefits of the proposed settlement and be forced to incur the risks and costs of this litigation avoided by the proposed consent judgment,” the SEC said in court papers filed today.

SEC Enforcement Director Robert Khuzami said in a statement yesterday announcing the appeal that the judge’s decision “is at odds with decades of court decisions that have upheld similar settlements.”

Monetary Penalty

In suits such as the one against Citigroup, the law doesn’t entitle the SEC to recover the amount lost by investors and instead only allows a monetary penalty up to the amount of a defendant’s ill-gotten gain, Khuzami said.

Rakoff’s approach “could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors,” he said.

The commission said today that it was unaware any court has ever before required that “proven or acknowledged facts” be established as a condition to the approval of a proposed consent judgment submitted by a federal government agency.

Danielle Romero-Apsilos, a Citigroup spokeswoman, said today in a statement that the New York-based bank disagrees with the court’s rejection of the settlement. The agreement “fully complies with long-established legal standards,” she said.

If the case went to trial, she said, “we would present substantial factual and legal defenses to the charges.”

Former Prosecutor

Rakoff, a former federal prosecutor and civil litigator, has previously criticized the SEC’s practice of allowing financial institutions to settle enforcement actions without admitting or denying the agency’s allegations. In 2009, he rejected a $33 million agreement between the SEC and Bank of America Corp.

In his Citigroup ruling, Rakoff consolidated the SEC’s case against the bank with its lawsuit against Brian Stoker, former director of the company’s collateralized debt obligation structuring group. Stoker was responsible for structuring and marketing the investment, according to an SEC complaint filed last month.

The judge said that in its complaint against Stoker, the SEC claimed Citigroup knowingly withheld information from investors that it intended the fund to include poorly rated assets, an allegation missing from the agency’s complaint against the bank.

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-07387, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Andrew Dunn, Peter Blumberg

To contact the reporter on this story: Patricia Hurtado in New York at

To contact the editor responsible for this story: Michael Hytha at

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